Response to consultation on Guidelines on supervision of significant branches

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Question 1: What are the respondents’ views on the overall approach to the organisation of supervision of the subset of significant branches with particular importance to the group or institution or to the financial stability in the host Member State (significant-plus branches)?

British Bankers’ Association response to the EBA’s Consultation Paper on Draft Guidelines on Supervision of Significant Branches (EBA/CP/2016/24)

14th of March 2017


The BBA is pleased to respond to the European Banking Authority’s (EBA) Consultation document on Draft Guidelines on Supervising Significant Branches.

The BBA is the leading association for UK banking and financial services representing members on the full range of UK and international banking issues. It has over 200 banking members active in the UK, which are headquartered in 50 countries and have operations in 180 countries worldwide. Eighty per cent of global systemically important banks are members of the BBA. As the representative of the world’s largest international banking cluster the BBA is the voice of UK banking.

All the major banking groups in the UK are members of our association as are large international EU banks, US and Canadian banks operating in the UK as well as a range of other banks from Asia, including China, the Middle East, Africa and South America. The integrated nature of banking means that our members are engaged in activities ranging widely across the financial spectrum from deposit taking and other more conventional forms of retail and commercial banking to products and services as diverse as trade and project finance, primary and secondary securities trading, insurance, investment banking and wealth management.

Our members manage more than £7 trillion in UK banking assets, employ nearly half a million individuals nationally, contribute over £60 billion to the UK economy each year and lend over £150 billion to UK businesses.

The BBA has considered the consultation document and subsequent questions and has obtained further input from its members. We would like to open by acknowledging that the proposed approach is welcomed in principle and would allow for better co-ordination of supervision of significant branches. However we recommend further enhancements which would make the approach more pertinent and practical to apply.

Overall Observations

Overall we found that the proposed Guidelines in principle provide:
- a co-ordinated way to manage supervision of significant branches between EU member state Home, Consolidating and Host supervisors;

- better separation of responsibilities between different regulators removing some aspects of regulatory duplication and risk of conflicting requirements or action;

- an improvement in how resolution is approached with focus of appropriate regulators on relevant aspects (e.g. Host regulator on the branch and systemic impact on the local market) with greater co-operation and co-ordination between regulators in setting, monitoring and implementing group wide recovery and resolution plans;

- for a rationalisation of reporting, supervisory visits and overall regulatory burden faced by firms operating across borders through branches.

However, we observe that further enhancement of the guidelines could benefit supervisors and firms regarding the following:

1.0 Definition of a Significant Plus branch

Current approach (pgh 7, 8, 25, 26of the proposed draft Guidelines) combining Article 51 definition of EU Directive 2013/36 with a clear decision tree on classing a firm’s branch as “Significant Plus” gives a clearer framework.

However, aside from the clearly stipulated test of whether the branch exceeds 2% of a country’s deposit base, there are no additional standardised benchmarks. This is seen as a shortfall of the proposed guidelines, especially in view of the upcoming consideration of proposed EU Intermediate Holding Company (Article 21-of the 2016/0364 (COD) proposal to amend EU Directive 2013/36). This would open up the risk of different interpretation between member states which could open up a situation where a firm’s branch is classed as “Significant Plus” in one market and not in another.

Furthermore, the proposed guidelines proposes focused assessment on, amongst others, corporate banking (pgh 28-b), payments/clearing/settlement (pgh 28-c), custody (pgh 28-d), intrabank borrowing/lending (pgh 28-e) and investment banking (pgh 28-f) without further clarifying what constitutes a “significant” or “material” role (similar to EU Directive 2013/36) opening it up for individual supervisor interpretation and potentially opening up the supervisory approach to divergent treatment of branches of a same firm by different national supervisors.

We believe it is critical to improve and standardise the transparency of classification of branches with application of a clear parameter based framework for defining whether a branch is a Significant Plus branch removing ambiguity and subjectivity from the process as much as possible.

We thus recommend that the EBA enhances the guidelines by:

- proposing further parameters/benchmarks (e.g. level of retail/SME accounts or deposits, % share of lending in the market, % share of payments systems, balance sheet size (banking book) on net or risk/adjusted basis, etc)

- focusing definition of critical functions on services (lending, deposit taking, payments, etc) provided to the Retail and SME segments, with inclusion of others only if exceeding a clear benchmark of materiality (e.g. in term of % of overall payments/custody assets, interbank/corporate services, etc, on net (after collateral, mitigation and netting) basis

2.0 Decision on classification as Significant Plus branch

Current proposal (pgh 15-21 of proposed draft guidelines) gives the ability for the home and/or consolidating supervisor to classify a branch as Significant Plus. In light of a lack of a clear parameter based definition framework (see point 1.0 above), we see this as potentially creating unnecessary subjectivity and ambiguity with risk of diverging views between supervisors leading to unwarranted regulatory burden of firms, especially where the decision may include EU and non-EU supervisors.

We thus recommend that the guidelines are amended to include the following:
- Explicit statements that
o branches of non-EU firms are out of scope (see also 4.0 below)
o for SSM firms ECB is both Home and Host supervisor

- Clarification that when a sufficiently standardised framework for the definition of a significant branch status is developed the decision will be under auspices of the Home supervisor, reflecting input from the Host supervisor, but that until this is achieved decision will be joint (by mutual agreement) between the home and host supervisors assuring that subjectivity and/or ambiguity is removed.

3.0 Recovery/resolution and macro-prudential co-ordination between Home/Consolidating and Host supervisors

3.1 Macroprudential decisions and co-ordination

Proposed approach for Macroprudential measures can be interpreted in a way that Home, Consolidating and Host supervisors should co-ordinate any Macroprudential implementation (pgh 58 of proposed guidelines) and that any action undertaken specifically by the Host supervisor should be communicated to the Home/Consolidating supervisors for consideration of voluntary reciprocity (pgh 59, 60 of draft guidelines).

Whilst this is an improvement of co-ordination between supervisors, it appears to:

- fall short of stipulating a clear decision prioritisation between the supervisors (when is the priority that of a Host supervisor, when that of the Home/Consolidating one(s))

- open up the possibility of inappropriate Macroprudential effect as it:

o considers only voluntary reciprocity by Home/Consolidating for Host supervisor decisions (e.g. CCB, SRB or other buffer/measure application) opening up possibility of the measure being cancelled out by business being moved from Host supervisor overseen branch to another entity overseen by other Host or Home/Consolidating supervisor.

o doesn’t give the ability to the Host supervisor to have a right of veto (for the supervised branch) of any Home/Consolidating supervisor applied Macroprudential measure (e.g. group wide buffer for a firm) for activates of the specific branch as they may not be appropriate for the relevant national market (and may have a counterproductive/unwarranted/adverse impact on it)

o doesn’t appear to follow the framework proposed by the European Commission (EC) under its 01/08/2016 Consultation on the Review of the EU Macroprudential Policy Framework

In light of the above, and in line with recommendations made in our response to the aforementioned EC consultation from August 2016, we recommend that the guidelines are amended to enhance the powers of Host supervisors thus making the approach more transparent for impacted branches/firms by:

- making any sector/product related Macroprudential actions of a Host supervisor subject to mandatory reciprocity by Home/Consolidating/other Host supervisor for a firm’s activities in the initiating host’s market/country

- allowing the Host supervisor to not apply any “blanket” Macroprudential measures that are deemed inappropriate for the activities of the branch in the relevant Host supervisor’s national market under an “apply or explain” approach assuring that decision of a Home/Consolidating/other Host supervisors do not create unwarranted adverse effects on the impacted Host supervisors national market

3.2 Recovery/Resolution

While one of the triggers for being classified as Significant Plus branch by a Host supervisor is the systemic importance of a branch to the national financial system/market, proposed guidelines instruct the Home/Consolidating supervisors to only “reflect” (pgh 70 of proposed guidelines) the inputs of the Host supervisor in the overall firm’s recovery and resolution plan(s) assessment. Similarly, the input of the host supervisor is highly detailed (pgh 69) but the inverse, the need for the Home/Consolidating supervisor to consult the home supervisor is not in place. Considering that a branch would be classed as Significant Plus only if it has systemic importance to the Host supervisors national financial system/market and/or economy, we see this as a shortfall which may lead to recovery/resolution plan(s) that, while appropriate at firm’s group level, may not be desired (or needed) for the national market in which the significant branch operates.

We recommend that the guidelines are amended to assure that elements of a firm’s group recovery/resolution plan that concern a Significant Plus branch (including provision of any shared services in a sustainable manner) are subject to joint approval by the Home and Host supervisor.

4.0 Framework for co-ordination with non-Member state supervisors

Furthermore we observe that in a number of Member states branches of non-EU states of Asian, Middle East, CIS, North American or Swiss banks may have significant presence, and/or systemic importance. Furthermore, Member state firms may operate systemically important branches in non-Member states where member state Home/Consolidating supervisors would require a co-ordination framework for effective supervision, resolution and recovery of such branches. However, the draft guidelines are mute on how the proposed college and dispute approach would treat such entities but does not explicitly confirm that branches of non-EU firms are out of scope.

We thus recommend that the EBA:
- Explicitly states that branches of non-EU firms are out of scope
- considers an approach allowing for co-ordination between Member and non-Member state based Host Consolidating and Home supervisors.

5.0 Regulatory Burden

Whilst the guidelines propose close co-ordination of visits and allocation of responsibilities (pgh 45-51 and 73-77 of proposed guidelines), they do not appear to give sufficient clarity on removal of potential duplication of requests (e.g. a group level request for information/visit necessitating activity at Significant Plus branch level and vice versa) which could result in a further increase in regulatory, compliance and reporting burden for firms operating Significant Plus branches.

We recommend that this potentially unintended issue is removed by EBA explicitly stating that information provided to, and/or actions/outcomes from visits initiated by the Host or Home/Consolidating supervisor, are shared and co-ordinated/ actioned in such manner as not to lead to duplication of efforts and/or undue and unwarranted increase in regulatory burden carried bv the firms.
We request that the final rules reflect these stated aims of the EBA here explicitly, by confirming that only existing reporting/ data formats would be requested by the supervisor where a branch is identified as Significant Plus.

Answers to Specific Questions from the Consultation Document:

Q1: What are the respondents’ views on the overall approach to the organisation of supervision of the subset of significant branches with particular importance to the group or institution or to the financial stability in the host Member State (significant-plus branches)?

As expressed in our Overall Observations above, while the proposed approach is welcome and increases clarity of separation of responsibilities between Host, Home and Consolidating supervisors, we recommend further enhancements which include:

a. Clear and standardised, parameter based definition framework for classifying a branch is a Significant Plus branch (see Overall Observations section 1.0)

b. Explicit statement that for SSM supervised firms ECB is both Host and Home supervisor

c. Until a standardised parameter based framework is developed the decision on a branch’s status will be joint between the Host and Home supervisor (see Overall Observations section 2.0)

d. Mandatory reciprocity by Home/Consolidating/Other host supervisors of Host supervisor macroeconomic decisions (see under Overall Observations section 3.1)

e. Obligatory joint approval of sections of the overall firm’s/group’s recovery and resolution plan that are relevant for the Significant plus branch by the relevant Host and Home supervisor (see Overall Observations section 3.2)

f. Explicit statement that branches of non-EU firms are out of scope

g. Need to enhance the college/dispute mechanism to permit inclusion of non-Member Home/Consolidating/Host supervisors (e.g. Asian, Swiss, North American) due to importance of branches of some non-Member banking groups in national markets of member states (see Overall Observations section 4.0) and vice versa.

h. Potential to further define the information sharing and co-ordination of actions removing the risk of unnecessary and unwarranted additional burden on firms operating Significant Branches from taking action on separate visits by Home, Consolidating and Host supervisors. (see Overall Observations section 5.0)

Question 2: What are the respondents’ views on the approach to and the criteria used for the identification of significant-plus branches (intensification test)?

Proposed intensification test is an improvement on current approach, however in our view it still falls short of removing ambiguity and risk of interpretation divergence between different Host or Host and Home regulators. In light of this we recommend that the test is enhanced with further standardised definitions based on clear parameters as per our comments under Overall Observations section 1.0.

Question 3: What are the respondents’ views on the determination of significance plus of the branch using the methodology for the identification of O-SII and whether such assessment can be meaningfully performed based on the data available to the host competent authorities?

While we consider it a step in the right direction, due to divergence between national supervisors it is still not sufficient in our view to remove ambiguity and risk of divergent interpretation by separate Host supervisors. Thus we recommend that the overall definition includes further standardised parameters/benchmarks as per our comments under Overall Observations section 1.0 removing subjectivity and ambiguity.

Question 4: What are the respondents’ views on the proposed approach to introducing branch risk assessment to be performed for significant-plus branches as part of SREP (section 5.1)?

We welcome the proposal, however we see continuing risk of duplication unless the co-ordination approach between supervisors is further defined and we recommend that the guidelines include direct applicability of actions taken by relevant supervisors to others in the college as per Overall Observations section 5.0.

Question 5: What are the respondents’ views on the proposed approach to the collection and exchange of information needed for the supervision of significant-plus branches (Section 5.4)?

Please see our response to Question 4.

Question 6: What are the respondents’ views on the proposed approach to the communication framework for a significant-plus branch, including communication with an institution and the branch (Section 5.6)?

Please see our response to Question 4.

Question 7: What are the respondents’ views to the proposed approach to the cooperation between the consolidating supervisors, home and host competent authorities for the purposes of the assessment of recovery plans (Section 5.7)?

A number of members states have branches (that could be considered significant or Significant Plus) of non-Member state firms. Similarly, a number of Member State Firms operate branches in 3rd countries that could be seen as significant or Significant Plus in these markets. As such, while the proposal represents an improvement in co-ordination framework between member state supervisors, it is lacking when it comes to addressing co-ordination between Member and non-Member state supervisors and we recommend that

- EBA explicitly confirms that branches of non-EU firms are out of scope, and

- That a framework is developed for co-ordination between Member and Non-Member state supervisors as per our comments under Overall Observations Section 4.0

For further information please contact Nemanja Eckert, Policy Director, BBA.

Name of organisation

British Bankers' Association